On July 16, 2021, California’s governor signed Assembly Bill 150 (AB 150). Among other things, this bill includes the “Small Business Relief Act”, which allows taxpayers to receive a credit for their share of state and local tax (SALT) deducted from the net income on their federal returns for their qualified business(es). This elective tax payment will be available from January 1, 2021 through January 1, 2026.
In 2017, Congress passed the “Tax Cuts and Jobs Act”, which limited the amount of SALT an individual could deduct from their tax return to $10,000. AB 150 uses a workaround in order to allow owners of certain qualified pass-through businesses to elect to pay a 9.3% tax at the entity level which is then a credit on their individual state tax return.
This workaround must be elected by an owner of a qualified business and then paid within a specified time period, or the election will be nullified. For the 2021 tax year, election and the 9.3% payment must be made on or before March 15, 2022.
For the 2022 through 2025 tax years, the elective tax will be due in two yearly payments with the first ½ due by June 15th and the second ½ due by March 15th of the following year. Non-payment of these installments will void the election.
Businesses must approve this election, but not every owner must participate. Owners who do not wish to take advantage of this elective tax will not be penalized or effect any other owner’s election.
We are in unprecedented times, with tax laws changing rapidly. There are possible changes that could be made that would affect this elective tax workaround, so it is important to have a tax accountant who is staying up to date on these laws. If you have questions, please contact us.